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'SARTHAK''SARTHAK'Training ModuleTraining Module
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TopicsTopics
Understanding Savings & Investments
Basics of Mutual Funds
Basics on Equity and India Growth Story
Different Types of Equity Funds & Tax Treatment
Goal Achievement Program (GAP)
Usage of Different Calculators
Debt Market
Different Types of Debt Funds & Taxation
NJ Platform
Objection Handling
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Basics of Savings & InvestmentBasics of Savings & Investment
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Saving is nothing but putting some money aside from your income.
We Save For:
Future Emergencies
For Liquidity
Savings = Income – Expenditure
At NJ we say
Expenditure = Income - Savings
Concept of SavingsConcept of Savings
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Investment is nothing but putting aside money from savings to grow for future consumption
Avoiding Current Consumption to Make Money Available for Future Need
Why Do We Have to Invest ?
< To Create Wealth >
< To Fulfill Future Financial Goals >
< To Buy Assets >
Concept of InvestmentConcept of Investment
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Rate Of Return : To Beat Inflation Liquidity : How Easy/Tough To Take Your
Money Back Risk : Risk of Principal, Risk of Real Return Taxation : ''As It Is Said There Are Two Things
Which You Can't Avoid – Death & Tax” Charges/Cost of Entry & Exit Safety Transparency
Things To Consider In InvestmentThings To Consider In Investment
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Inflation : In Simple terms Rise in Prices Money looses it's value due to inflation As seen in previous slide, we make investment
for future consumption/to meet future goals. Cost of this consumption/goal will keep on rising due to inflation
It is very important for any investment to beat inflation rate to generate positive return.
Inflation : The Biggest EnemyInflation : The Biggest Enemy
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How Money Looses Value Due To How Money Looses Value Due To InflationInflation
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How Money Looses Value Due To How Money Looses Value Due To InflationInflation
Product 1992 2002 2012
Petrol 15.71 28.91 73.18 8.00% 158 232
Movie Ticket 30 100 300 12.20% 949 1687
Masala Dosa 10 25 100 12.20% 316 562
Toothpaste 5 35 100 16.16% 447 946
Milk 4 15 40 12.20% 126 225
MBA Fees - 150000 700000 16.65% 3266667 7056807
Avg Inflation 12.90%
Annual Price Rise
Projected Price 2022
Projected Price 2027
If inflation is at around 11 to 12%, Do You Think Is It Worth Investing In a Product Giving Less Than This Rate of Return ?
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Inflation Impact On Your Monthly Inflation Impact On Your Monthly ExpenseExpense
Inflation Assumed @ 7%
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Compounding is nothing but earning interest on interest
Reinvestment of interest/dividend to generate additional return in future at the same rate
e.g. Rs.1 lakh will become Rs.1.1 lakh at the end of 1 year @ 10% return. In 2nd year, return will be generated on Rs.1.1 lakh & not on Rs.1 lakh.
Compounding – Your Weapon To Compounding – Your Weapon To Fight InflationFight Inflation
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e.g. Suresh & Mahesh are two friends. Suresh opted for a job which pays him Rs.1 lakh per month.
Mahesh asked for a package which starts with 0.10 (Yes, 10 paisa) on 1st day and then keep on doubling every day.
Any guesses who will make more money at the end of 30th day and how much ?
Effect of CompoundingEffect of Compounding
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Suresh will get his decided salary of Rs.1 lakh at the end of the month.
Mahesh will get Rs.5.36 cr at the end of 30th day.
The same logic applies to your investment.
Effect of CompoundingEffect of Compounding
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It takes 8 years to double your money if money grows @9%, whereas you can double your money in less than 5 years @15% compounding.
Effect of Compounding on Effect of Compounding on InvestmentsInvestments
Year End Value @9%Value @15%1 1,09,000 1,15,0002 1,18,810 1,32,2503 1,29,503 1,52,0884 1,41,158 1,74,9015 1,53,862 2,01,1366 1,67,710 2,31,3067 1,82,804 2,66,0028 1,99,256 3,05,9029 2,17,189 3,51,78810 2,36,736 4,04,556
1 2 3 4 5 6 7 8 9 10
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
Compounding Impact
Year End Value @9% Value @15%
Initial Investment is Rs.1 lakhs
Effect of Compounding Increases as Investment Period Increases
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How To Create Wealth From Your How To Create Wealth From Your Investment ?Investment ?
Wealth creation is nothing but enhancement of future valueWealth creation is nothing but enhancement of future value
FV = PV (1 + r)nPV r nThe more you The more you save, makes a save, makes a
differencedifferenceThe more you The more you earn, makes a earn, makes a
differencedifference
The sooner you The sooner you start, makes a start, makes a
differencedifference
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Different Investment AvenuesDifferent Investment Avenues
Investment Avenues Taxability Liquidity Tenure Risk Feature
Financial Investment Avenues
Bank Fixed Deposits# 6% - 7% Interest Taxable Very Low No. of days to years Low -
Senoir Citizen Saving Scheme 9.00% Interest Taxable Medium 5 Years^^^ Low -
National Savings Certificate 8.00% Interest Taxable Medium 6 Years Very Low
PPF 8.80% Tax Free Very Low 15 Years Low -
Kisan Vikas Patra 8.25% Medium 8 Years 7 months Very Low Deposits are exempt from Wealth tax.
Post Office Recurring Deposits 7.50% Low 5 Years Very Low -
Monthly Income Savings 8.00% High 6 Years Very Low Deposits are exempt from Wealth tax.
Company F D 11-12.5% Interest Taxable Low Ranges from 3 – 5Years High -
Mutual Fund Debt Variable^^ Low Low -
Mutual Fund Equity 15.00% Nil High Ideally 5 Years or more High -
Direct Equity 15.00% Nil High Ideally 5 Years or more Very High -
Physical Investment Avenues
Gold - - Very High - Medium
Real Estate - Low - Medium
Range of Returns
Investment eligible for rebate U/S 80C of I.T. Act. (I) Annual accrued Interest is also eligible for rebate U/S 80C of I.T. Act 1961
Interest Taxable, no TDS
Interest Taxable, no TDS
Interest Taxable, no TDS
10% (20% with indexation)*
Ranges from 1 month – 5 Years
Gold has always proved as a good hedge against inflation
LT Capital Gain Tax applicable on
Indexation cost
* LT Capital Gain Tax# 5 yr Bank FD eligible u/s 80C^^ Depending on Product^^^ Tenure is extendable by another 3 years
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Equity Investment : Wealth Creation Equity Investment : Wealth Creation Through CompoundingThrough Compounding
Inflation Gold Silver Bank Deposits Co. Deposit Sensex-2
0
2
4
6
8
10
12
14
16
18
6.8
9.810.8
8.89.8
15.7
2.83.7
1.92.8
8.3Actual GainReal Gain
Blue Bar Chart indicates Actual return and red indicates return over inflation ( Real Return).
Analysis From 1981-82 to 2011-12
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Equity Has Outperformed Other Equity Has Outperformed Other Asset ClassesAsset Classes
Inflation Gold Silver Co Deposits Bank Deposits Sensex0
10000
20000
30000
40000
50000
60000
70000
80000
90000
7,218
16,44721,591
16,68212,678
79,942
Growth of Rs.1,000 in Different Asset Classes
Source: RBI, BSE, INTERNAL, For Bank FD, median rate is taken for 1-3 year period. For Co FD Return is assumed 1% higher than bank F.D. Data Period: March 1981 – March 2012
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Mutual Funds BasicsMutual Funds Basics
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Mutual Fund ConceptMutual Fund Concept
• MF is a common pool of money.
• Investors with common investment objective place their contribution.
• This money is invested according to pre-stated objective of the scheme.
• Ownership of the fund is mutual, joint amongst all investors.
• Every investor is allocated units of the scheme based on amount of investment & NAV
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Mutual Fund StructureMutual Fund Structure
SEBI
AMC
Unit holders
Savings
Units
Trust Investments
Returns
Trust
AMC Custodian
Registrar
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MF AdvantagesMF Advantages
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• NAV = Net Assets of the Scheme / Number of outstanding units i.e.
(Market Value of Investments + Receivables + Other Accrued Income + Other Assets – Accrued Expenses – Other Payable – Liabilities)
_______________________________________________
Number of Outstanding Units
What is NAV ?What is NAV ?
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MF US ExperienceMF US Experience
• United States is the world's largest MF market.
• US accounts for 49% of global MF assets
• US MF Size at the end of 2011 was $11.6 trillion
• Total worldwide mutual fund assets : $23.8 trillion
• Equity Funds account for 45% of total assets ($5.22 trillion)
• Mutual Funds manage 23% of US household financial savings.
• 52.3 million – Number of households owning MF
• 44% households own MF
Source: Investment Company Institute 2012 Fact Book. ICI is a national association of US investment companies.
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MF US ExperienceMF US Experience
Source: Investment Company Institute 2012 Fact Book. ICI is a national association of US investment companies.
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MF Global PerspectiveMF Global Perspective
Country AUM No of AMC/SchemesUSA $11.6 trillion >650 AMCUK $1.02 trillion
Japan $675 bn 3937 fundsChina $380 bn 1000 schemes
Canada $834 bn 150 AMCThailand $93 bn 23 AMCFrance $1.56 bn 608 AMC
Hong Kong $743 bn Dominated by Equity Funds with entry load of 5%Australia $1.72 trillion
Italy $1.27 bn 302 AMCIndia $150 bn 43 AMC
Global AUM $23.8 trillion
Indian MF industry offers HUGE potential both in terms of AUM and AMC growth.
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Break Up of Indian Household Break Up of Indian Household Financial AssetsFinancial Assets
Break Up of Household Financial Assets
Bank FD 46.8 45.00%
20.8 20.00%
Life Insurance 15.6 15.00%
Cash 10.4 10.00%
Direct Equity & Equity MF 7.28 7.00%
Other Debt Papers 3.12 3.00%
Total 104 100.00%
(in Rs. Lakh Cr)
% of Total Financial Assets
PPF, NSC & Other Postal Schemes
Source: Business Standard Sept 2012
Opportunity of >Rs.67 lakh cr for advisor community.
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Why MF Investments Are Safe ?Why MF Investments Are Safe ?
• Trustees are appointed by Sponsor. At least 2/3rd of trustees/board of trustees have to be independent.
• If any sponsor wants to wind up business in India, they've to bring in new sponsor & has to give an exit option to investors without any charges for 30 days. e.x. L&T buying Fidelity business.
• The structure of MF in India makes it impossible to go bankrupt.
• Investors' money is managed by AMC and Fund Manager. Fund Manager only plays role of advisor to the scheme.
• Assets of the schemes are held by custodian. Custodian is independent to the AMC & controlled by trustees.
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• Fund Managers also have to work within broad investment framework and can not behave as per his own wishes. e.g. fund manager of large cap fund having investment mandate of investing only in stocks belong to BSE100 has to pick stocks only from that index.
• The entire structure is monitor by SEBI
Why MF Investments Are Safe ?Why MF Investments Are Safe ?
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EquityEquity
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• Equity consists of two words : 'Equal Ownership'
• All equity holders are equal owners in the business to the extent of number of shares held by them.
• e.g. As an investor you believe that hospitality business has great future in India. What will you do to get benefited from that ? Can you build a five star hotel ? The answer is 'No' but you can buy shares of 'Indian Hotels' & become part owner of Taj Group of Hotels.
You are convinced that more & more people will buy four wheelers in India in coming 5 years. So you will go and buy shares of 'Maruti' or 'Mahindra & Mahindra'.
EquityEquity
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• Each Share Trades at a Particular Price
• 'Price' is a result of 'Demand – Supply' among other many important factors.
• 'Price' is nothing but present value of all future expected profit.
• Value of all assets of the company – tangible and intangible (like goodwill, human capital etc.)
• Price can never be 'Zero' or 'Negative'.
PricePrice
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• It consists of two things : 'Earnings' and 'No of Shares'
• It is nothing but amount of earnings, net profit available for each share.
• EPS = PAT (Profit After Tax or Net Profit) / No of Equity Shares
Earning Per Share (EPS)Earning Per Share (EPS)
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Example of Earning Per Share (EPS)Example of Earning Per Share (EPS)
Reliance Inds. ACC
Number of Shares (crores) 157.38 18.77
PAT (crores) Trailing 4 qrts 16,111.54 1,189.90
Therefore, EPS = 16111.54 / 157.38 1189.90 / 18.77
EPS in Rs. (unit) 102.37 63.41
Figures are hypothetical.
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• PE is a valuation measure.
• It indicates how expensive/cheap a stock is.
• It indicates how much price, market is willing to pay for each rupee earning of the company.
• So PE Ratio = Market Price / EPS
• PE can be trailing PE (based on past performance) or forward PE (based on future expected growth).
Price to Earning Ratio (PE) RatioPrice to Earning Ratio (PE) Ratio
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Example of PEExample of PE
Reliance Inds. ACC
Current Price (25th Nov 08) 1,071.70 397.15
EPS 102.37 63.41
Therefore, P/E = 1071.7 / 102.37 397.15 / 69.7
Price to Earnings Ratio 10.47 6.26
Figures are hypothetical.
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• Mr. Antony runs 'Pearl Beach Cafe' in Goa.
• The cafe is ideally located and very famous for it's food among tourists.
• The cafe made net profit of Rs.2.5 lakh on revenue of Rs.12 lakhs in 2010. Margin of 20%. The cafe is 2 year old.
Understanding PEUnderstanding PE
• In 2010 Mr. Antony decides to sell his cafe.
• How much will you pay for this business ?
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• For some reason Mr. Antony cancels his decision to sell the cafe.
• To increase business he decides to introduce live music band in the cafe & increase the area.
• 3 years later, the business & footfall increase manifold.
'Pearl Beach Cafe' Continues...'Pearl Beach Cafe' Continues...
• Now in 2013 the cafe made Rs.25 lakhs as net profit. (10 fold rise from 3 years back) on revenue of Rs.80 lakhs. Translating into profit margin of 30% compared to 20% earlier.
• Now how much will you pay for this business ?
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• Now Mr. Antony will demand premium for his business because of higher revenue and profit.
• As an investor or businessman you will also don't mind paying higher valuation in 2013 compared to 2010 as profit margin as well as revenue have gone up.
• As profit and profit margin both have gone up of the business in 3 years, so as it's valuation.
'Pearl Beach Cafe' Continues...'Pearl Beach Cafe' Continues...
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• This gives an idea about the size of the company in terms of market value.
• Based on Market Capitalization, companies can be divided in : Large Cap, Mid Cap & Small Cap companies.
• Market Cap = Market Price of Share * No of Outstanding Shares
Market CapitalizationMarket Capitalization
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Example of Market CapitalizationExample of Market Capitalization
Large Cap Stock Mid Cap Stock
Reliance Inds. Apollo Tyres
Current Price 1,071.70 22.30
Number of Shares (crores) 157.38 50.40
Therefore, MKt. Capt. 157.38*1071.7 50.40 * 22.3
168,663.07 1,123.96Market Capitalisation (crores)
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What Drives Equity Return ?What Drives Equity Return ?
• In Short Term:
• Sentiment
• Liquidity
• News Flow
• Emotions
• Rumors
• Volume
• Demand & Supply
• And Many More
• In Long Run:
Equity prices are driven only by growth in profitability.
As it is said : In long term, equity prices are slaves of corporate earning.
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Stock Prices follow earning growth. If company is delivering consistent earning growth then sooner or later this growth gets reflected in stock price.
Price – Earning Relation of Reliance Price – Earning Relation of Reliance Industries LtdIndustries Ltd
03/02 03/03 03/04 03/05 03/06 03/07 03/08 03/09 03/10 03/11 03/12
0
100
200
300
400
500
600
700
800
900
1000
Reliance Industries
Net Prof it Price
RIL 1 year 2 years 3 years 5 years 7 years 10 yearsNP Growth 26.57% 26.15% 32.67% 29.79% 24.82% 19.98%Stock Price Growth -8.07% 33.76% 21.99% 41.12% 29.87% 19.86%
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Price – Earning Relation of HDFC BankPrice – Earning Relation of HDFC Bank
03/02 03/03 03/04 03/05 03/06 03/07 03/08 03/09 03/10 03/11 03/12
0
200
400
600
800
1000
1200
1400
1600
1800
2000
HDFC Bank
Net Prof it Price
HDFC 1 year 2 years 3 years 5 years 7 years 10 yearsNP Growth 30.49% 30.97% 30.86% 30.90% 33.50% 33.06%Stock Price Growth -0.60% 26.85% 32.28% 32.20% 22.40% 27.16%
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Price – Earning Movement of SENSEXPrice – Earning Movement of SENSEX Just as we saw for individual stocks, it's true for SENSEX also.
Dec/90
Dec/91
Dec/92
Dec/93
Dec/94
Dec/95
Dec/96
Dec/97
Dec/98
Dec/99
Dec/00
Dec/01
Dec/02
Dec/03
Dec/04
Dec/05
Dec/06
Dec/07
Dec/08
Dec/09
Dec/10
Dec/11
Dec/12
Sensex ValueSensex Earnings
Months Sensex Value
Dec-90 999.26 59.02Dec-12 19,426.71 1,108.20CAGR 14.44% 14.26%Co-relation coefficient 0.96
Sensex Earnings
HarshadMehta Bubble
Crash After IT Bubble
Sub Prime Crisis
Market Went Ahead of Earning Growth in early 08 & 11
Despite volatility, scams and Sub Prime Crisis, SENSEX has followed earning growth over a period of last 22 years.
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Nobody Makes Money in Equity MarketNobody Makes Money in Equity MarketYear SENSEX Amount (INR)
1979 100 1 lakh
2012 19500 1.95 cr
Return 17.33%
Major Events of Last 33 Years:
• Assassination of 2 Prime Ministers
• Asian Currency Crisis, IT Bubble Burst & Sub Prime Crisis
• Harshad Mehta & Ketan Parekh Securities Scam
• Balance of Payment Crisis of 1991
• Gulf War & Kargil War
• 10 Different Governments
Despite All These Major Events, SENSEX
has delivered close to 18% annualized return in last 33 years
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Equity Not Risky in Long TermEquity Not Risky in Long TermPERFORMANCE OF BSE SENSITIVITY INDEX - Equities not risky in long run
Yrs YEAR END SENSEX level 1 year 3 years 5 years 7 years 10 years 12 years 15 years 20 years
0 31-Mar-79 100.00
1 31-Mar-80 128.57 28.57%
2 31-Mar-81 173.44 34.90%
3 31-Mar-82 217.71 25.52% 29.61%
4 31-Mar-83 211.51 -2.85% 18.05%
5 31-Mar-84 245.33 15.99% 12.25% 19.66%
6 31-Mar-85 353.86 44.24% 17.58% 22.44%
7 31-Mar-86 574.11 62.24% 39.49% 27.05% 28.36%
8 31-Mar-87 510.36 -11.10% 27.66% 18.58% 21.77%
9 31-Mar-88 398.37 -21.94% 4.03% 13.50% 12.61%
10 31-Mar-89 713.60 79.13% 7.52% 23.81% 18.48% 21.72%
11 31-Mar-90 781.05 9.45% 15.24% 17.16% 20.52% 19.77%
12 31-Mar-91 1167.97 49.54% 43.12% 15.26% 24.97% 21.01% 22.73%
13 31-Mar-92 4285.00 266.88% 81.76% 53.04% 42.80% 34.71% 33.94%
14 31-Mar-93 2280.52 -46.78% 42.93% 41.76% 21.78% 26.84% 23.95%
15 31-Mar-94 3778.99 65.71% 47.90% 39.57% 33.11% 31.45% 26.85% 27.40%
16 31-Mar-95 3260.96 -13.71% -8.70% 33.09% 35.03% 24.87% 25.60% 24.05%
17 31-Mar-96 3366.61 3.24% 13.86% 23.58% 24.81% 19.35% 24.39% 21.86%
18 31-Mar-97 3360.89 -0.17% -3.83% -4.74% 23.18% 20.74% 20.63% 20.02%
19 31-Mar-98 3892.75 15.82% 6.08% 11.29% 18.77% 25.60% 17.29% 21.43%
20 31-Mar-99 3739.96 -3.92% 3.57% -0.21% -1.92% 18.02% 18.05% 19.92% 19.85%
21 31-Mar-00 5001.28 33.73% 14.17% 8.93% 11.87% 20.40% 23.47% 19.31% 20.09%
22 31-Mar-01 3604.38 -27.93% -2.53% 1.37% -0.67% 11.93% 14.45% 13.03% 16.38%
23 31-Mar-02 3469.35 -3.75% -2.47% 0.64% 0.89% -2.09% 13.23% 13.63% 14.85%
24 31-Mar-03 3048.72 -12.12% -15.21% -4.77% -1.41% 2.95% 8.32% 14.53% 14.27%
25 31-Mar-04 5590.60 83.38% 15.76% 8.37% 7.54% 3.99% 2.24% 14.71% 16.92%
26 31-Mar-05 6492.82 16.14% 23.23% 5.36% 7.58% 7.13% 9.11% 15.16% 15.66%
27 31-Mar-06 11279.96 73.73% 54.67% 25.63% 17.08% 12.85% 9.54% 16.32% 16.06%
28 31-Mar-07 13072.10 15.89% 32.73% 30.38% 14.71% 14.55% 12.27% 7.72% 17.60%
29 31-Mar-08 15644.44 19.68% 34.06% 38.69% 23.33% 14.92% 13.66% 13.70% 20.14%
30 31-Mar-09 9708.50 -37.94% -4.88% 11.67% 15.84% 10.01% 9.24% 6.49% 13.94%
31 31-Mar-10 17527.77 80.54% 10.27% 21.97% 28.39% 13.36% 13.36% 11.86% 16.83%
32 31-Mar-11 19445.22 10.94% 7.52% 11.51% 19.49% 18.36% 14.73% 12.40% 15.10%
33 31-Mar-12 17404.20 -10.50% 21.48% 5.89% 15.13% 17.50% 10.95% 11.59% 7.26%
Probability of Loss 12/33 6/31 3/29 3/27 1/24 0/22 0/19 0/14
Probability of Loss (%) 36.36% 19.35% 10.34% 11.11% 4.17% 0.00% 0.00% 0.00%
As Time Increases, Volatility Decreases
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Give Time To The Market than Timing Give Time To The Market than Timing The MarketThe Market
Fixed investment at highest sensex value every cal-endar year
Fixed investment at low est sensex value every cal-endar year
Systematic In-vestment on first day of every month
11.98%
14.96%
13.56%
Data source: www.bseindia.com; capitalmarket; Data for period from Jan 1988 to Sep 2012
You can not time the market to perfection. Even if you do, end result in return is not substantial, making market timing a wasteful exercise.
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One Who Can Control Emotions, Can One Who Can Control Emotions, Can Make Money in Equity MarketMake Money in Equity Market
Typical Retail Investors Psychology of Fear, Greed & Hope.
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Cycle of Market EmotionsCycle of Market Emotions
Optimism
Excitement
Wow, I feel great
About my decision.
I knew market will go up.
Euphoria.Greed Anxiety.
Let me Average here.
It's Temporary.I'm a long term investor.
Emotion of Hope
Panic
Depression/Capitulation
Panic Selling byInvestor
Equity Market is
Just Not for Me
Hope
Optimism
Great InvestmentOpportunity
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Best Returns Are Made When Best Returns Are Made When Investment is Done in Bad TimesInvestment is Done in Bad Times
Fall after Tech Bubble Burst.
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
Feb-
00
May
-00
Aug-
00
Nov
-00
Feb-
01
May
-01
Aug-
01
Nov
-01
Feb-
02
May
-02
Aug-
02
Nov
-02
Feb-
03
May
-03
Aug-
03
Nov
-03
Feb-
04
May
-04
Aug-
04
Nov
-04
Feb-
05
May
-05
Aug-
05
Nov
-05
Feb-
06
May
-06
Aug-
06
Sensex fell by 56%
1 Year; 16%
3 Years; 29%
5 Years; 36%
Market Correcting due to NDA loosing elections.
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep-
04
Nov
-04
Jan-
05
Mar
-05
May
-05
Jul-0
5
Sep-
05
Nov
-05
Jan-
06
Mar
-06
May
-06
Jul-0
6
Sep-
06
Nov
-06
Jan-
07
Mar
-07
May
-07
Sensex fell by 27%
1 Year; 44%
2 Years; 65%
3 Years; 47%
In 2004, market fell by 27% when NDA lost election but gave 47% return in next 3 years from low of May, 2004.
In 2000, market fell by 56% after technology bubble burst, only to give stunning return of 29% in next 3 years.
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Best Returns Are Made When Best Returns Are Made When Investment is Done in Bad TimesInvestment is Done in Bad Times
0
5000
10000
15000
20000
25000
SENSEX Since Sub Prime Crisis of 08-09
SENSEX fell by 61% from Jan 08 to March 09
In 3 years since March 09, SENSEX Delivered 29% CAGR by rising from 8200 To 17500 level.
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India Has Long History of Equity Fund India Has Long History of Equity Fund PerformancePerformance
Performance of equity schemes with more than 10 year of track record.
Initial Investment Assumed at Rs.1 lakh.
Years 10 15Current Value (in Rs) 912,411 1,632,794Avg Return of Diversified Equity Funds (CAGR %) 24.74 20.47BSE SENSEX 19.19 11.77Nifty 18.41 12.00Total Number of Schemes Covered 55 15Number of Times Money is Multiplied 9 16
CAGR Return of Lumpsum Investment of Rs.1 lakh as on 31st Dec, 2012
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Why FII Can't Ignore IndiaWhy FII Can't Ignore India
• India is one of the fastest growing economies in the world. Second only to China.
• Well diversified equity market with representation from multiple sectors (unlike Brazil & Russia which are commodity heavy)
• Efficient and transparent capital market
• Vast pool of entrepreneurs, offering vast opportunity of investment
• Strong demographic and domestic consumption driven economy.
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FII Investment TrendFII Investment Trend
CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12
-15
-10
-5
0
5
10
15
20
25
30
35
1.52.7
0.7
6.78.6
10.8
8.1
17.8
-12.2
17.6
29.3
-0.5
25
FII Investment in US$ BN
Only 2 years in last 13 years when FIIs have remained net sellers in Indian market.
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India Growth StoryIndia Growth Story
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India Infrastructure GrowthIndia Infrastructure Growth
(2002-06) (2007-12)
Actual Infra Investment Rs.9,19,225 cr Rs.20,54,205 cr
Pvt Sector Share 25.00% 35.00%
As % of GDP 5.00% 9.00%
10th Five Yr Plan11th Five Yr Plan
(Revised Projection) (2012-17)
Projected Infra Invst $1 trillionPvt Sector Share 50.00%
As % of GDP 10.00%
12th Five Year Plan
Government is committed to spend $1 trillion on infrastructure during 12th plan (2012-17)
50% of this investment ($500 bn) is expected to come from private sector.
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India Infrastructure - PowerIndia Infrastructure - Power
• Total Installed capacity is 2.10 lakh MW, 57% is coal based.
• Power Deficit – 11400 MW, close to 9% of demand.
• Installed capacity in China : over 10 lakh MW (1140 GW), will surpass USA.
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• 120000 MW power capacity to be added in 12th plan.
• After modernization of Delhi, Mumbai, B'lore and Hyderabad airports, many smaller airports are to be modernized
• 13 major ports handling 1011 million tonnes of cargo every year. Additional investment of Rs.5 lakh cr planned by 2020. (Chinese ports handle 10 billion tonnes in a year)
• Average speed of truck on Indian highway is just 35 km (22 miles) per hour compared to 75 km (47 miles) in the USA.
India Infrastructure - $1 trillion India Infrastructure - $1 trillion OpportunityOpportunity
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300
120
1013
Infrastrcuture Spending 12th Plan (2012-17)
Pow er
Higw ay
Airport
Seaport
India Infrastructure - $1 trillion India Infrastructure - $1 trillion OpportunityOpportunity
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• Consumption in India will grow from Rs.17 trillion to Rs.34 trillion by 2015 and Rs.70 trillion by 2025.
• India will overtake Germany and Italy by 2025.
• Middle Class consumers will multiply manifold from 50 million to 583 million by 2025.
India Consumption Led EconomyIndia Consumption Led Economy
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17.00%
27.00%56.00%
Composition of Indian Economy
Agriculture Industry/Manufacturing Services
Composition of Indian EconomyComposition of Indian Economy
India is predominantly a service & domestic consumption oriented economy.
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Corporate Earning & Nominal EconomyCorporate Earning & Nominal Economy Qty Produced (Shirts) Price Sales
Year 1 1000 Rs. 200 Rs. 200000
Economic growth takes place
And production increases. 7% 6% 13.42%
(Real GDP) (inflation) (Nominal GDP)
Year 2 1070 Rs. 212 Rs.226840
As we can see with increase in production activity by 7% and price rise of 6% company’s revenue (Nominal GDP) grows by 13.42% which can get reflected in corporate profitability with little higher growth rate.
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SENSEX ProjectionsSENSEX Projections
Closing Value of Sensex as on April 30, 2011 19136, PE 20.52, Future Earning assumed at constant 20% CAGR
Closing Value of Sensex as on April 30, 2011 19136, PE 20.52, Future Earning assumed at constant 15% CAGR
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Equity FundsEquity Funds
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• As per definition of SEBI, the fund with equity holding of more than 65% is treated as equity funds.
Classification of Equity FundsClassification of Equity Funds
Blend Funds Midcap Funds
Theme Funds Sector Funds
Equity Oriented Funds
Balanced Funds
Index Funds
International Funds
Diversified Equity Fund
Largecap Funds
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• Large Cap Funds
• This type of funds invest in bluechip/large cap stocks
• Less volatile compared to mid cap funds
• Provides stability to the portfolio.
• Small & Mid Cap Funds
• This type of funds invest in mid cap/small sized stocks
• Volatility is normally higher than large cap funds
• Return potential is also high.
Types of Equity FundsTypes of Equity Funds
Another category is 'Blend Fund' which invests across market cap, both large cap and mid cap stocks.
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• Advantages:
• Suitable for conservative investors
• Lower expense ratio
• Ease to take investment call as return will replicate index.
• Disadvantages:
• Limited role of a fund manager.
• No possibility of generating 'alpha'
• In India, index funds have underperformed diversified funds.
Index FundsIndex Funds Index fund is also called 'passive fund' as it simple replicates a particular index. Index fund invests in stocks and sectors exactly as it is represented by an index.
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Sector FundsSector Funds
• Theme funds invest generally in one or couple of sectors based on the objective of the fund. In other words these funds concentrate on one or two industries
• Example
- IT Funds: Franklin Infotech Fund
- Pharma Funds: Reliance, UTI Pharma & Healthcare
- Banking Funds: Reliance Banking Fund
- FMCG Funds : ICICI Prudential FMCG Fund
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Theme FundsTheme Funds Theme funds invest in securities which meet a specific
criterion or which have the same characteristics. These types of funds can be diversified funds or sector funds.
• Example,
- Dividend Yield Funds – these funds invest in stocks where dividend yield is high as compared to market/index average.
- Infrastructure Funds - these funds invest in stocks which are related to infrastructure like roads, ports, railways, aviation, electricity, etc., thus these type of funds invest in number of sectors
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International FundsInternational Funds
• International funds invest towards the global equities with the main objective of diversifying the portfolio geographically
• By investing in these funds, investor can diversify his portfolio across various international markets.
• Examples:
- Birla Sun Life International Equity Fund
- AIG World Gold Fund
- Principal Global Opportunity Fund
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Balanced FundsBalanced Funds• These types of funds buy a combination of common
stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk.
• The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents
• These funds are generally for moderate investors who don’t want to take complete risk of equity but also want attractive returns from the investment
• Example:
- HDFC Prudence Fund
- Tata Balanced Fund
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Taxbility of Equity FundsTaxbility of Equity Funds
Taxbility of Equity Oriented Funds (2012-13)
STCG Tax LTCG Tax Dividend Income DDT TDS
Resident Individual/HUF 15.00% NIL Tax Free NIL NILPartnership Firm/AOP/BOI 15.00% NIL Tax Free NIL NIL
Domestic Cos 15.00% NIL Tax Free NIL NIL
NRI 15.00% NIL Tax Free NILSTCG : 15%LTCG : Nil
ELSS
• Equity Linked Saving Scheme (ELSS) is the diversified equity scheme where normally equity investments are around 80%-100% and rest in cash
• The scheme has added advantage of tax deduction u/s 80C upto Rs. 1 Lac, but investments will be locked-in for 3 years which quite low as compared to traditional avenues
• E.g. gross income = Rs. 5 Lacs & investment of Rs. 1 Lac is done in ELSS, then Income tax has to be paid on Rs. 4 Lacs
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ELSS Vs PPFELSS Vs PPF
PPF Compsite Avg. of ELSS
0
5
10
15
20
25
30
35
40
45
15.80
40.84
ELSS vs PPF
Value of 9.10 Lacs (As of 30-Sep-12)
(Rs
. La
cs
)
It is assumed that investment of Rs. 70,000 is done every year on 31st of March since year 2000. Current Value is as on September 30, 2012
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ELSS PerformanceELSS Performance
Starting January Month of 2012 2010 2008 2003 1998Years 1 3 5 10 15Invested Amount (in Rs) 1,20,000 3,60,000 6,00,000 12,00,000 18,00,000Current Value (in Rs) 1,36,020 4,09,707 8,08,576 29,33,385 1,13,38,097Avg Return of Diversified Equity Funds (CAGR %) 26.95% 8.68% 11.90% 16.74% 21.39%BSE SENSEX 21.05% 5.88% 8.70% 13.93% 13.99%Nifty 21.68% 6.54% 9.05% 13.70% 13.88%Total Number of Schemes Covered 27 27 24 15 5
SIP Return as on 31st Dec, 2012
Note: SIP of Rs.10000 per month.
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Goal Achievement ProgrammeGoal Achievement Programme
Achieving Your Goals in Life
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Defining GoalDefining Goal
Goal gives direction to your investment process.
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Important Goals in LifeImportant Goals in Life
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Higher EducationHigher Education
What is the Average Age when a child needs Higher Education?
20 Years
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What is the Average Cost ofHigher Education Today?
Engineer : Rs.10 LacsMedical : Rs.15 LacsForeign Study : Rs.25 Lacs
Planning For Higher EducationPlanning For Higher Education
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Assuming Current Age is 3 years: (17 yrs remaining)Engineer : Rs.27 LacsMedical : Rs.41 LacsForeign Study : Rs.67 Lacs
How much would the Higher Education cost you at the maturity?
Assuming inflation @ 6%
Planning For Higher EducationPlanning For Higher Education
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24 Years
What is the Average Age when a child gets married?
Planning For MarriagePlanning For Marriage
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Planning For MarriagePlanning For Marriage
What is the Average Expense ofMarriage Today?
Rs.10 Lacs
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Planning For MarriagePlanning For Marriage
How much would your child’s Marriagecost you at maturity?
Rs.34 Lacs
Assuming inflation @ 6%. Current Age is 3 years & Marriage Age is 24 years
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Rs.34 Lacs
Are you on the right path to arrangea decent marriage for your child?
Assuming inflation @ 6%. Current Age is 3 yrs & Marriage Age is 24 yrs.
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Retirement PlanningRetirement Planning
What is the Average Retirement Age?
60 Years
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Retirement PlanningRetirement PlanningRetirement PlanningRetirement PlanningRetirement PlanningRetirement Planning
Rs.20000/- p.m.
What is an Average Monthly Expense of a Middle-class House Hold?
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Retirement PlanningRetirement Planning
How much Retirement Kitty would you need at Retirement?
Rs.3.55 Crores
Monthly Expenses would grow from Rs.20,000/- to over Rs.129000/- at Retirement & would continue to grow thereafter…
Current Age: 28 years. Retirement Age - 60 yrs. Life Expectancy - 90 yrs. Assuming inflation @ 6%. Returns on Retirement Kitty – 8%
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Retirement PlanningRetirement Planning
Are you on the path to a Peaceful Retirement?
Rs.3.55 Crores
Current Age: 28 years. Retirement Age - 60 yrs. Life Expectancy - 90 yrs. Assuming inflation @ 6%. Returns on Retirement Kitty – 8%
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Financial Goals SummaryFinancial Goals SummaryBrief Look at Our Life Goals
Assuming: Current AgeSelf : 28 yrs Child: 3 yrs
Child’s Education : 20 yrsEngineer : Rs.27 LacsMedical : Rs.41 LacsForeign Study : Rs.67 Lacs
Child’s Marriage : 24 yrsMarriage : Rs.34 Lacs
Retirement: : 60 yrs (Self)Retirement Kitty : Rs.3.55 Crores
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Are You On Track To Achieve These Are You On Track To Achieve These Life Goals ?Life Goals ?
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Creating Wealth To Achieve GoalsCreating Wealth To Achieve Goals
How much can a personsave on a regular basis?How much can a personsave on a regular basis?How much can a personsave on a regular basis?How much can a personsave on a regular basis?
Rs.5,000/- p.m.
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Creating Wealth To Achieve GoalsCreating Wealth To Achieve Goals
If a person can save Rs.5,000/- per monthWhat will be his wealth when he retires?
Assuming: Current Age: 28 yrs. Retirement Age: 60 yrs.
Invests in an Asset class that gives returns of 8%
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Creating Wealth To Achieve GoalsCreating Wealth To Achieve Goals
At 60 years of age his wealth would have been
Rs.84 Lacs
Amount Invested: Rs. 19.20 Lacs. Times amount gets rolled over: 4.37.
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We Need to Create Wealth
Creating Wealth is Easy
We can all Become Wealthy
The Truth Is...The Truth Is...
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3 Simple Steps of Wealth Creation3 Simple Steps of Wealth Creation
How can we create wealth?
Start Saving Early
The longer you save, the more you make
Save in the Right Asset Class
This will dictate how much wealth you create …
Save Regularly
Even a small amount saved regularly, is good
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1.33 Crores*
5.71 Crores*
40 years25 years 60 years
Ram Shyam
Investment Starting Age 25 40
Investment - Monthly SIP Rs.5,000/- Rs.10,000/-
Saving Years till age 60 35 years 20 years
Total Investment Made Rs.21 lacs Rs.24 lacs
Starting Early
Give time to your investments rather than timing
* Constant Savings
Note: The above figures are for illustrative purpose only. There is no guarantee that the projection given would materialize.
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Invest In Right Asset ClassInvest In Right Asset Class
Equity market (represented by BSE Sensex) has outperformed all other investment avenues
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Gold Silver Sensex Co Deposits Bank Deposits Inf lation
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Save RegularlySave Regularly
Twin Benefits of Investing Regularly
Disciplined Investing through Systematic Investment Plans (SIPs) is the ideal way to reduce risk
Market Units Purchased MarketUnits Purchased
Rupee Cost Averaging Average Purchase cost will be less
Automatic Timing At higher prices - less unitsAt lower prices – more units
Rising Market Falling Market
Save Regularly
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Creating Wealth Through Right Asset Creating Wealth Through Right Asset ClassClass
If a person can save Rs.5,000/- per monthWhat will be his wealth when he retires?
Assuming: Current Age: 28 yrs. Retirement Age: 60 yrs.
Invests in an Asset class than give returns of 20%
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Any Guesses ???Any Guesses ???
At Age 60 his wealth can beAt Age 60 his wealth can be
Rs.11.30 Crores
Amount Invested: Rs. 19.20 Lacs. Times amount gets rolled over: 58.86.
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Past Performance of Equity SchemesPast Performance of Equity Schemes
SIP Return in % as on 30th September 2012 Starting-October Month of 2011 2007 2002 1997Years 1 5 10 15Invested Amount : 1,20,000 6,00,000 12,00,000 18,00,000Current Value (in Rs) 1,33,878 7,90,710 31,76,767 1,09,84,968Average Return of Diversified Equity Schemes (CAGR in %) 23.51 10.96 18.3 20.93BSE 30 (SENSEX) 20.93 7.30 14.47 13.86NSE 50 (NIFTY) 22.24 7.69 14.17 13.77Total Number of Schemes Covered 114 105 38 15
SIP of Rs.10,000 per month
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Investment WisdomInvestment WisdomWisdom
• The Right way to create wealth …
Buying potential big winning stocksSuccessfully timing the marketsFollowing Expert Advisors recommendationsSaving a lot of money
• Wealth can be successfully created if we follow the three principles ...
Starting early and saving for longInvesting in the right asset classInvesting Regularly – big or small
“We do not need to be wealthy to be an investor …But we can be wealthy if we are investors”
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Using The WisdomUsing The WisdomUsing the Wisdom
• We all have goals and objectives in life to achieve like …Child EducationChild MarriagePurchase of House, CarRetirement, etc
• We can direct our savings to achieve our goals!!
Disciplined Savings
Sufficient Time
Right Asset Class
Goal Achievement
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NJ Goal Achievement Programme (GAP)NJ Goal Achievement Programme (GAP)
• NJ GAP is a unique goal based investment programme through a Systematic Investment Plan (SIP)
• Investors in this programme have the flexibility of choosing a monthly investment amount as well as the investment duration of their choice
• This should enable the investors to plan for their goals without needing to review, re-invest or for that matter, time the markets.
Monthly Investment Options Investment Horizons
Rs.2,000/- Rs.5,000/- 5 years 10 years
Rs.10,000/- Rs.15,000/- 15 years
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NJ Goal Achievement Programme (GAP)NJ Goal Achievement Programme (GAP)
Advantages to the Investors …
Investments in the right asset class …In Equities with potential to earn very attractive returns
• Investment at lower risk…By Diversification, professional management, and investing by the way of SIP
• Hassle-free process of wealth creation You only have to fill the GAP Application form and the Auto Debit (ECS)
form and submit it with one cheque*
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Helping You Achieve Your GoalsHelping You Achieve Your Goals
Child Education - Saving years: 17 yrs
Helping you achieve your goals in life …
Education Target GAP Amt.
Engineer Rs.27 Lacs Rs.2,000
Medical Rs.41 Lacs Rs.3,000
Foreign Study` Rs.67 Lacs Rs.5,000
Child Marriage - Saving years: 21 yrs
Target : Rs.34 LacsGAP Amount : Rs.1,500
Assuming returns of 20%. GAP figures are rounded off .
Amount Actually paid: 3.78 Lacs
Amount Actually paid: 4.08 Lacs (for 2,000)
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Helping You Achieve Your GoalsHelping You Achieve Your Goals
Retirement - Saving years: 32 yrs
Target : Rs.3.55 CroresGAP Amount : Rs.1,038
Amount Actually paid: 4 Lacs
Small monthly investments of few thousand rupees can help you Achieve your goals & Relax in life!
Assuming returns of 20%. GAP figures are rounded off .
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Helping You Achieve Your GoalsHelping You Achieve Your Goals
Systematic Investment Plan (SIP)
Very Effective & Proven
Way of Wealth Creation &
Goal Achievement
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Why SIP ?Why SIP ?
Paifa kamane ke do rafte hote hai.....ek fortcut aur doofra chota fortcut
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• But Unfortunately in Investment There is no 'fortcut' or 'chota fortcut'
• There is only 'longcut' and investors need to be patience and have to invest for a long period to create wealth and achieve goals.
• To gain the most from 'SIP' one needs to keep investing through market cycle of 'Bull' and 'Bear' without stopping in between due to short term market volatility.
Why SIP ?Why SIP ?
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Why SIP ?Why SIP ?
• There are some things that money can't buy. For everything else there's mastercard.
Similarly in equity investment, there are some things which you can't do i.e. market timing & that's why we've 'SIP'
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Why SIP ?Why SIP ?
24/07/98 06/12/99 19/04/01 01/09/02 14/01/04
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SENSEX Movement Feb 99 to Jan 03
Total CAGR of 0.127% in 4 years.
Total CAGR of 0.127% in 4 years.
01/11/98 09/02/99 20/05/99 28/08/99 06/12/99 15/03/00
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SENSEX - Feb 99 to Jan 2000
06/12/99 15/03/00 23/06/00 01/10/00 09/01/01
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SENSEX CY2000
Up by 61%
Fall of 23%
SENSEX remained flat from3233 to 3250 level for 4 yrs from Feb 99 to Jan 03. But it was up by 61% from Feb 99 to Jan 2000.Only to fall by 23.7% from Jan 2000 to Dec 2000
Can You Time Your Entry & Exit ?
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Why SIP ?Why SIP ?
Feb 99 to Jan 03
Scheme Name % Return
Franklin India Bluechip Fund 10
Franklin India Prima Fund 16.79
Reliance Growth Fund 14.65
Reliance Vision Fund 22.61
Average Return 16.01
Although SENSEX has not gone anywhere during this period, SIP investors have benefited during this flat market period by generating 16% return.
Note: Schemes mentioned here are only for explanation purpose. This does not indicate any recommendations from NJ India Invest Pvt Ltd. Returns are on % CAGR Basis.
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SIP in Recent Market Volatility ?SIP in Recent Market Volatility ?
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SENSEX from Feb 08 to Jan 13
CAGR of 2.8% in 5 years.
03/01/08 22/02/08 12/04/08 01/06/08 21/07/08 09/09/08 29/10/08 18/12/08 06/02/09 28/03/09
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SENSEX Feb 08 - Feb 09
Market fall of 50% in 1 year from 18000 to 9000
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SENSEX from Feb 09 to Jan 13
CAGR of 22.5% in 4 years.
SENSEX has delivered 22.5% CAGR from Feb 09 to Jan 13. How many investors able to participate ?
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SIP Performance : Action Speaks SIP Performance : Action Speaks Louder Than WordsLouder Than Words
Starting January Month of 2012 2010 2008 2003 1998
Years 1 3 5 10 15
Invested Amount (in Rs) 1,20,000 3,60,000 6,00,000 12,00,000 18,00,000
Current Value (in Rs) 1,36,700 4,13,880 8,37,092 31,27,381 1,08,63,857
Avg Return of Diversified Equity Funds (CAGR %) 28.17% 9.36% 13.25% 18.05% 20.73%
BSE SENSEX 21.05% 5.88% 8.70% 13.93% 13.99%
Nifty 21.68% 6.54% 9.05% 13.70% 13.88%
Total Number of Schemes Covered 112 112 105 39 13
SIP Return as on 31st Dec, 2012
SIP has outperformed both benchmark indices across time frame, more so as investment horizon increases.Note: SIP of Rs.10000 per month.
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SIP : Partner EarningSIP : Partner Earning
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Using Financial CalculatorsUsing Financial Calculators
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Use of SIP Dynamic CalculatorUse of SIP Dynamic CalculatorSIP Return Calculator (sheet name “Dynamic”)
• This calculator helps to find out value of investment done through SIP
• It also indirectly helps to find out the value of investment with
1) same SIP amount with different rate of return and
2) different SIP amount with same rate of return
15%
10
10,000
2,630,182
2,630,182
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Use of SIP Dynamic CalculatorUse of SIP Dynamic CalculatorSIP Table (sheet name “SIP Returns”)
• This calculator helps to find out value of investment done through SIP for different periods and different rates of return
• This calculator can also be used to find out the importance of amount of investment, i.e., with higher amount of SIP, advisors can show a huge difference in the value of investment for long term
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SIP Need CalculatorSIP Need CalculatorSIP Need Calculator
• This is important and useful tool as number of investors want to know the SIP amount for the target amount and period
• This tool also helps to show the importance of rate of return and amount to be invested
• This tool gives SIP amount with different rates of return which remain handy to chose appropriate asset class to achieve the target amount
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SIP Delay Cost CalculatorSIP Delay Cost CalculatorDelay Cost Calculator
• This is a unique calculator which helps to show investors the importance of timely investment
• Advisor can use this tool across the investor and show how much is the impact of the delaying the SIP.
• As we can see in example, mere 6 months delay in SIP of Rs.10000 can cost investor Rs.4.5 lakh at the end of 25 years.
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Use of SIP + FP CalculatorUse of SIP + FP Calculator• Generally, for Indian investors following are the prime
goals in life. - Child’s Education- Child’s Marriage- Retirement of the Investor
• This tool is helpful to make financial plan for the above goals. This tool helps to find out investment amount needed for each goal as well as total amount for fulfilment of all goals.
• Details of investor’s goal have to be added in the “Client Details”.
• This tool has a facility to add details of advisor also.• After adding all necessary information, financial plan will
be ready without manual calculation. Letter is also generated.
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Use of SIP + FP CalculatorUse of SIP + FP CalculatorUse of SIP + FP CalculatorUse of SIP + FP Calculator
Advisors Details
Name X Y Z Firm Name ABC Pvt Ltd.
Address Surat
Contact Details Ring Road, Surat
• Advisor’s detail
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Use of SIP + FP CalculatorUse of SIP + FP Calculator• Client Details
Advisors Details
Name X Y Z Firm Name ABC Pvt Ltd.
Address Surat
Contact Details Ring Road, Surat
Cell No. 9876543210
Fixed Line 0261-2345678
Email address [email protected]
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Use of SIP + FP CalculatorUse of SIP + FP Calculator• Financial Plan
Advisors Details
Name X Y Z Firm Name ABC Pvt Ltd.
Address Surat
Contact Details Ring Road, Surat
Cell No. 9876543210
Fixed Line 0261-2345678
Email address [email protected]
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Why Use FP CalculatorWhy Use FP Calculator
• Advantage of using SIP-FP-Calculator- This tool will give you an edge over other competitors
- This tool will help you to prepare financial plan very fast and may be across your investor which make you more effective
- You can make an investor loyal to you and thus beneficial to investor and you in the long term
- You can increase SIP input amount and there by increase revenue for you
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Use of FP CalculatorUse of FP Calculator
• Generally, for Indian investors following are the prime goals in life. - Child’s Education- Child’s Marriage- Retirement of the Investor
• This tool is helpful to make financial plan for the above goals. This tool help to find out investment amount needed for each goal as well as total amount for fulfilment of all goals.
• Details of investor’s goal has to be added in the “Client Details”.
• This tool has a facility to add details of advisor also.• After adding all necessary information, financial plan will be
ready without manual calculation. Letter is also generated.
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DEBT MARKETDEBT MARKET
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Importance of Money & Debt MarketImportance of Money & Debt Market
Money & Debt markets fulfil the basic needs of borrowing and lending of the market participants
Borrowers… who are in need of cash Lenders… who have surplus cash
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Importance of Money & Debt MarketImportance of Money & Debt Market
Public Sector Units (PSU) Bonds
Debt Market Segments in India
Government Securities
Corporate Securities
The market for Govt. Securities comprises the Centre, State & State-sponsored securities. This is the oldest & most dominant in terms of Market Cap, Outstanding Securities, Trading Volumes & no. of Participants.
Corporate Securities comprises of commercial paper & bonds. This market has been in vogue since the early 1980s. After the de-regulation of interest rates on corporate bonds in 1992, a variety of structures and instruments have been introduced like securitized products, floating rate instruments with caps and floors etc. The major part of the corporate debt is privately placed with tenors of 1-12 years.
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Market ParticipantsMarket Participants Borrowers: Who are the major borrowers?
The Government of India is the largest borrower in the market
Corporates
Why does the Central Government Borrow?Financing of gross fiscal deficitCapital expenditureRepayment of external borrowingServicing of outstanding borrowings
How does the Government borrow?The Government /Corporate borrows by
issuing Fixed income securities
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Market ParticipantsMarket Participants
Investors: Who are the Investors?
Banks,
Mutual funds and
Insurance Companies
Why do they invest ?
Surplus money for a certain period/s
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Participants & Products in Debt MarketParticipants & Products in Debt MarketIssuer Instrument Maturity Investors
Central Government T bills
Corporates/PDs
PSUs 0-7 years
Corporates Debenture 1-12 years
Bank Bonds 1-10 years
Central Government 2-30 years
PSUs Bonds 5-10 years
State Government 5-13 years
91/364 days
RBI, Banks, Insurance Cos, Provident Funds, Mutual Funds.
Commercial Paper
15days to 1 year
Banks, Corporate, Financial Institution, Mutual Funds, Individual, FIIs.
Scheduled Commercial Bank
Financial Institutions
Certificate of Deposit (CDs)
15 days to 1 year 1
year to 10 years
Banks, Corporate, Financial Institution, Mutual Funds, Individual, NRI, Trusts
Municipal Bonds
Banks, Corporate, Individuals, Trusts, Mutual Funds, Financial Institutions, NRI.
Banks, Mutual Funds, Institutions, Individuals
Scheduled Commercial Bank
Corporations, Trusts, Mutual Funds, Associations, FI, NRIs.
Dated Securities
RBI, Banks, Insurance Cos, Provident Funds, Mutual Funds.
Banks, Insurance Companies, Corporates, PF, Mutual Funds, Individuals.
Dated Securities
Banks, Insurance Companies, Provident Funds.
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Bond MarketBond Market
The market for newly-issued bonds is referred to as the Primary market.
After the bond has been issued, investors can
sell their bonds at any time until maturity.
The market where bonds are bought and sold
(exchanged or traded) among investors is called
the Secondary market.
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Fixed Income SecuritiesFixed Income Securities The Government and the Corporate borrow by
issuing Fixed Income Securities.
What are Fixed Income Securities? Fixed income securities are investments that
provide a return in the form of fixed periodic payments. Credit Quality, Yield & Maturity are key components of Fixed Income Securities.
issuerMaturity date
coupon
9.81% GOI 2013
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Bond DefinitionBond Definition❐ A bond is a written conditional promise to pay a specific
principal sum at a determined future date and interest (coupon payments) on fixed dates
❐ Bonds are secured loans that investors make to corporations and governments. Corporations and governments issue bonds when they want to raise capital.
❐ One of the factors that make bonds appealing is that they pay a set amount of interest on a regular basis.
❐ Bonds are a type of investment vehicle that can provide investors with two kinds of return: current income (coupon payments) and capital gains. Bonds are considered one of the main sources for refinancing.
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Bond TerminologyBond Terminology
❐ The issue date is the day on which the life of a bond starts. The term to maturity defines the period of time, or the life of the bond. The bond's maturity date is the date on which the last payment is due.
❐ The face value (also called par value or principal sum) of a bond & represents the amount that will be repaid to the bondholder at maturity.
❐ The coupon is the nominal annual rate of interest that is paid to the bondholder on a regular basis. It is usually expressed as a percentage of the face value (coupon rate). The coupon rate is either fixed or variable.
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Bond TerminologyBond Terminology
❐ The purchase price is the price the investor pays to buy the bond, i.e., to receive this series of cash flows (coupon and face value). The coupon period is not necessarily the same for all the bonds. The coupon payments are made semi-annually, or annually.
❐ Yield on Security is the implied interest rate offered by a security over its life, given its current market price.
❐ Difference between Yield & Coupon: The difference between yield and coupon arises because the market price of a security might be different from the face value of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.
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Yield To Maturity (YTM)Yield To Maturity (YTM)
❐ The Yield to Maturity or YTM refers to the percentage rate of return paid on a bond, note or other fixed income security if the investor buys and holds the security till its maturity date.
In other words, it equals all the interest payments you will receive (and assumes that you will reinvest the interest payment at the same rate as the current yield on the bond) plus any gain (if you purchased at a discount) or loss (if you purchased at a premium).
It is the internal rate of return of the valuation equation
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Yield To Maturity (YTM)Yield To Maturity (YTM)❐ Example: An 11.68% ICICI Bond maturing on 06 -Dec-2010, is
being priced in the market on 06-Dec-2008 at Rs 104.20. Face Value is 100. Interest payment is done Annual.
In this example,
Face Value (FC) = Rs. 100;
Coupon Payment (CP) = 11.68%; Purchase Price(PP)= 104.20
Current Yield = (11.68/104.20)*100 = 11.20%
Yield to Maturity (YTM)
current price =
104.20 =
By trial & error, r ( YTM) will be 9.28%
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Fixed Rate BondFixed Rate Bond
Coupon is 5% payable semi annually
Purchase Price
Term to Maturity Maturity Date
Fixed Rate Coupon Payments (Rs. 2.50)
Last Coupon
Face Value
Issue Date
15 September 2003 15 September 2008
Coupon is 5% payable semi annually
Rs 100
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Floating Rate BondFloating Rate Bond
Purchase Price
Term to maturity Maturity Date
Floating rate Coupon Payments
Last Coupon
Face Value
Issue Date
15 September 2003
3 year bond annual resets
Rs 100
Mibor+0.50%
Mibor+0.50%
15 September 2006
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Zero Coupon BondZero Coupon Bond
Purchase = Rs 70Price
Term to Maturity Maturity Date
Face Value =Rs 100
Issue Date
15 September 200315 September 2006
Accrued Interest
Purchase Price=90
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Risk Factors in DebtRisk Factors in DebtImportant Risk associated with Bond Market• Credit Risk• Interest Rate Risk• Liquidity Risk• Call Risk• Inflation Risk• Re-investment Risk
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Credit RiskCredit Risk❐ For a bond investor, there are primarily two types of credit
risk: default risk and downgrade risk.❐ Default risk is the risk of non-payment of Principal or
interest or both.❐ Downgrade risk is the risk that a bond is reclassified as
a riskier security by a credit rating agency. When an issue is re-categorized or its credit rating is changed, the yield adjusts immediately to reflect the new rating.
❐ This kind of risk in the context of a Government security is always zero.
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Credit RiskCredit Risk❐ To find out credit risk, Credit Rating agencies give rating to different
corporate papers (bonds) based on many factors. This includes the economic environment at large, the ability of the issuer to make good on its promise and the general political condition in the country.
❐ Rating Agencies: CRISIL, CARE, ICRA, FITCH, etc.❐ For ex., CRISIL’s Long Term Ratings Scale
❐ ST Ratings Scale is given by P1 TO P5❐ '+' (plus) or '-' (minus) signs to reflect comparative standing
Investment Grade Ratings Speculative Grade Ratings
AAA Highest Safety BB Inadequate Safety
AA High Safety B High Risk
A Adequate Safety C Substantial Risk
BBB Moderate Safety D Default
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Interest Rate RiskInterest Rate Risk INTEREST RATE RISK
- Higher the maturity of the Bond higher the Interest Rate sensitivity (Risk)
- Prices of bonds with higher maturity will go down more if the interest rate risess and vice versa
Price
Bond Price Movements
Interest
Maturity 1
Maturity 2
Price change 1Price
change 2
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ExampleExample
7% ICICI Bonds 2009 for Rs. 100
NO!
He would get the higher price
To his surprise on 2 Feb 2004
Interest Rate on ICICI Bond is down 1 %
Do you think he would get Rs 100 if he sells his bond?
Mr. Vijay buys on 2 Feb 2003
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Example Continues....Example Continues....
• How Much Less he would get for his Bond ????
• To understand that we need to know the Modified Duration of the Bond
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Modified DurationModified Duration
- Modified Duration is the direct measure of the interest rate sensitivity of a bond
% Change in Price of a bond =
(-) Modified duration * Change in Yield (in %)
- Higher the maturity – higher the modified duration – higher interest rate sensitivity
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How Much Less ?How Much Less ?Percentage change in the Price of Bond
= Percentage change in the Interest Rate * Modified Duration of Bond
So Mr. Vijay would get = -1% *- 5( Assumed Modified Duration) = 5 % higher price
He would realize Rs. 105 if he sells the Bonds
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Other RisksOther RisksLiquidity Risk: It is the risk that a given security cannot be
traded quickly enough in the market to prevent a loss (or make the required Profit)
Call Risk: This is the risk faced by the holder of a Callable Bond. Typically, bond issuers will call a bond because of the high rate they are paying on the bond. If interest rates have declined since it first issued the bonds, issuers will often call the bond once it becomes callable and will create a new issue at a lower rate. The bondholders will then lose out on the high rate of their bond and will have to invest in a lower rate environment.
Re-investment Risk: This "reinvestment risk" is especially evident during periods of falling interest rates where the coupon payments are reinvested at less than the yield to maturity at the time of purchase.
Inflation Risk: The uncertainty over the future real value (after inflation) of your investment.
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Risk ProfileRisk Profile
Investment horizon
Days 1 year
Short Term Plans
Liquid/Liquid Plus
Floating Rate Funds
ST FMPs
Arbitrage Funds
LT FMPs
Income Funds
Gilt Funds
MIPs
Risk
3 – 6 Mths
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Debt FundsDebt Funds
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Type of FundsType of Funds
Type of Funds Liquidity Expected Return Suitability Target Investor Underlying Asset
Liquid Funds Very High 6 – 8% Short Term Parking Substitute to Savings A/C
Liquid Plus Very High 7 – 9% Short Term Parking Substitute to Savings A/C CP, CD, Call Money Mkt
Short Term Funds Very High 8- 9% 3 months – 1 yr FD Client in falling interest rate market CP, CD,Debenture
Income Funds 3 working days 9 – 12% 1 – 2 years FD Client in falling interest rate market
Gilt Funds 3 working days 9 – 12% 1 – 2 years FD Client in falling interest rate market Only GOI Securities
MIP 3 working days Around 10% 1 – 3 years Conservative Debt Investors
CP, CD, Call Money Mkt Less than 90 days
CP, CD, Debenture, NCD, G Sec More than 1 yr maturity
All of income funds + Equity (15 to 30%)
Note: Return mentioned here is only for indicative purpose. This does not guarantee rate of return. Return depends on market movement.
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Taxbility of Debt FundsTaxbility of Debt Funds
Taxbility of Equity Oriented Funds (2012-13)
STCG Tax LTCG Tax TDS
Resident Individual/HUF As per Slab Tax Free NIL
As per Slab Tax Free NIL
Domestic Cos Tax Free NIL
NRI As per Slab Tax FreeSTCG : 15%
LTCG : Nil
Dividend Income
DDT – Other Than Liquid/Money
Market Schemes
DDT – Liquid/Money
Market Schemes
10% (20% with indexation)
13.519% (12.5% + 5% Surcharge + 3%
Cess)
27.038% (25% + 5% Surcharge +
3% Cess)
Partnership Firm/AOP/BOI
10% (20% with indexation)
32.44% (30% + 5% Surcharge + 3%
Cess)
32.445% (30% + 5% Surcharge +
3% Cess)32.445% (30%
+ 5% Surcharge + 3% Cess)
10% (20% with indexation)
32.44% (30% + 5% Surcharge + 3%
Cess)
32.445% (30% + 5% Surcharge +
3% Cess)
10% (20% with indexation)
13.519% (12.5% + 5% Surcharge + 3%
Cess)
27.038% (25% + 5% Surcharge +
3% Cess)
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Fixed Maturity PlanFixed Maturity Plan• Investment Objective : FMPs are close-ended debt
funds with a fixed maturity horizon ranging from three months to five years. The objective of such a scheme is to generate nearly fixed type of returns over a fixed-maturity period.
• Liquidity : 3 business days
• Risk : Credit risk, Interest Rate Risk (low if redeem at maturity)
• Applicable Loads : Entry Load – NIL Exit Load – NIL if held till maturity
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Tax Efficient Return Compared to Bank Tax Efficient Return Compared to Bank F.D.F.D.
Particulars Income Fund Bank FDInvestment Amt (Rs) 1,00,000 1,00,000
Rate of Return/Interest Rate (%) 10.00% 10.00%Tenure (Days) 366 366
Value After 1 Year (Rs) 1,10,000 1,10,000Gain on Investment 10000 10000
Long Term Capital Gain Tax (10.3%) 1030 N.A.Tax on Interest Income (30.9%) N.A. 3090
Net Value After Tax (Rs) 1,08,970 1,06,910
Effective Rate of Return 8.97% 6.91%
- It can be seen that even if the Bank FD gives the same rate of return as of MF debt scheme, post tax return is considerably higher in MF debt scheme
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Suitability of Debt FundsSuitability of Debt Funds
Category Suitability Target against
Very ST FDs (< 1 month)
Liquid Plus Funds
ST FMPs (less than a year) FDs < 1 year
ST Gilt Funds FDs < 1 year
FDs < 1 year
Arbitrage Funds FDs < 2 years
LT FMPs (more than a year)
Income Funds
LT Gilt Funds
Liquid & ST Floating Rate Funds
Surplus in Current account & short term parking, especially for Non Individuals
Surplus in Current account & short term parking, especially for Non Individuals
Very ST FDs (< 3 months)
Surplus availability for specific periods & nearly fixed type of returns required
Surplus availability for more than 6 months & up to 1 year without credit risk
Short Term Funds & LT Floating Rate Funds
Surplus availability for more than 6 months; ready for variable returns
Surplus availability for more than 6 months & up to 2 years
Surplus availability for specific periods more than a year & nearly fixed type of returns required
FDs, Post Term Deposit, RBI Bonds
For investors who understand interest rate cycle & credit risk and want to gain from it
FDs, Post Term Deposit, RBI Bonds
For investors who understand interest rate cycle and want to gain from it without credit risk
FDs, Post Term Deposit, RBI Bonds
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Asset AllocationAsset Allocation
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Asset AllocationAsset Allocation
• It works on simple principle of diversifying your risk
across asset class.
• Asset Allocation is a process of selecting the right
mix of asset class depending on investor’s risk
profile and investment goals.
• Asset Allocation is a primarily important element in
wealth creation process. An appropriate asset
allocation is very critical to be decided and
followed.
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Asset AllocationAsset Allocation
92%Asset Allocation
2% Market Timing
6% Security Selection
• 92% of investment performance is
asset allocation.
• Security selection accounts for 6% and
market timing only 2%
• Unfortunately we spend maximum time
on something which contributes
minimum to investment performance.
As per the study of Brinson, Singer, Beebouwer
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Understanding Asset AllocationUnderstanding Asset Allocation
Story of three friends......
•Three friends received Rs 1,00,000.00 in the year 2000.00
•Mr SMART - Invested at the bottom & got out at the top, however he invested only 10%
•Mr Fool – Invested at the top and stayed invested
•Mr Balance – Invested 50% in Equity and 50% in Debt and kept on balancing
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Mr. SmartMr. Smart•Invested in SEP 2001 , 10000 Rs in Equity when markets were at 3000
•Dis-invested in Jan 2008 when markets were at 21000
•On the balance 90000 Rs of investments he made 8% compounded annually
His equity money has grown 7 times from 2001 to 2008. He redeemed at 21,000 and reinvested Rs. 70,000/- at 9,000 level
Debt return is calculated till Feb 2010
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Mr. FoolMr. Fool
•Mr Fool invested the entire 1,00,000 at 6000 market level and is still invested at index of 16000
His equity money has grown 2.7 times during this period.
Current value is calculated at 16,000 SENSEX level in Feb 2010
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Mr. BalanceMr. Balance
• Mr Balance invested 50% at 6000 level and rebalance when market crashed at 3000 level and again rebalanced when market was at 21000 and at 9,000 levels.
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Mr. BalanceMr. Balance
Initial investment assumed in Sept 2000. Rebalancing is done at SENSEX level of 3000, 21000, 9000 & 16000 levels; Debt return assumed at 8% p.a.
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Summary of End ValueSummary of End Value• Mr Smart : Rs.2,97,563
• Mr. Fool : Rs.2,66,667
• Mr. Balance : Rs.3,71,004
Key LearningKey Learning
• Asset Allocation automates market timing and reduces the risk of market volatility.
• Asset allocation helps you invest scientifically.• In the long run, participation in equity matters
rather than the market timing.
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Disclaimer:The above presentation is for private circulation only. This is for information purpose only and is not intended to be and must not be taken as the basis of any investment decision. Nothing in this presentation should be construed as an investment advice ,and/or as an advice to buy or sell or solicitation to buy or sell any mutual fund / schemes. NJ India Invest has taken due care & caution in preparing this presentation and the information has been taken from various sources. However, NJ or any of its employees, Partners, do not take any responsibility or liability, expressed or implied, whatsoever, for any investment decision made or taken on the basis of this presentation. The viewers are strongly advised to seek expert professional help before making any decisions. The presentation contents returns / performance figures which are for illustrative purpose only. There is no guarantee that the projection given would materialize. NJ IndiaInvest or any of its employees or Network Partners cannot be held responsible for any performance or non-performance of the illustrations / projections depicted in this presentation. Risk Factors: Mutual funds and securities are subject to market risks and there can be no assurance and no guarantee that the objectives of Mutual Fund schemes invested in can be achieved. As with any investment in securities, the NAV of the units issued under the Scheme (s) can go up or down, depending up on the factors and forces affecting the capital markets. Past performance of the Sponsor/AMC/ does not indicate or guarantee the future performance of the Scheme(s) of any Mutual Fund. Investors are therefore urged to read the Offer Document (s) carefully, and consult their legal/tax/investment advisor before they invest in the scheme(s). Investors in the scheme(s) are not being offered a guaranteed or assured rate of return or monthly or regular/periodical income distribution, and the actual returns and/or periodical income distribution to an investor will be based on the actual NAV, which may go up or down, depending on the market conditions. Kindly refer to the Offer Document of the respective schemes carefully prior to investing.